• Dated 08^th December, 2025

KARNATAKA HC ORDERS MANDATORY CONSIDERATION OF DIFFERENTIAL TAX REFUND CLAIMS IN WORKS CONTRACTS

Brief Facts of the Case

The assessee executed works contracts spanning periods before and after the goods and services tax implementation, with certain post-transition agreements incorporating pre-existing value added tax schedules. The assessee paid goods and services tax on the entire value as statutorily required but sought reimbursement of the differential tax burden from employer authorities through representations, which were denied on the grounds of schedule revisions and ineligibility for prior regime linkage.

Assessee's Contention

The assessee contended that contracts finalized post-goods and services tax yet based on earlier schedules entitled it to segregation of pre- and post-transition works, deduction of value added tax and service tax for earlier portions, application of goods and services tax with input tax credit to balance works, and reimbursement of net differentials via supplementary agreements, supported by government circulars and coordinate bench precedents affirming tax neutrality.

Respondent's Contention

The respondents argued against refunds, asserting that post-transition schedule revisions invalidated prior value added tax linkages, no statutory basis existed for reimbursement absent explicit contract provisions, and claims required resolution through dispute clauses rather than writ jurisdiction.

Court's Decision

The court directed employers to segregate pre-transition works assessed under value added tax from post-transition balance works, compute material rates by deducting value added tax and service tax then adding goods and services tax with input tax credit offsets, determine per-contract differentials, execute supplementary agreements as needed, and reimburse excess liabilities including for pre-transition works paid later. Assessees must submit representations within four weeks for processing within eight weeks, with permissions for amended returns sans interest or penalty under interim orders and temporary restraint on tax authority actions.

BTA's Comments

This decision establishes clear procedural guidelines for transitional works contracts, ensuring tax neutrality through segregation and reimbursement while balancing employer verification needs. It aligns with circulars and precedents but leaves room for appeals, emphasizing contractor documentation for swift implementation.

Writ Petition No. 25439 of 2023, decided on 16-9-2025

Author: Sneha Nandi